August 26, 2021
The independent economy is on an upward trajectory. With 68 million freelancers, contractors, and gig workers, by 2025, it’s expected that 54% of Americans will be independent workers. Additionally, 49% of currently employed workers express interest in leaving their job for independent work.
Even though the independent economy is growing steadily and more people are moving into independent work, there's no infrastructure for helping independent workers navigate what's essentially a completely different approach to taxes.
This obstacle is not just going to hinder the growth of the independent economy. As we found out, it’s currently hurting individuals who may be at risk of audit or financial instability simply because they don’t know how to navigate a system that was never built for independent workers in the first place.
Our Report Findings and Takeaways
In our new report on the “State of Taxes in the Independent Economy,” we surveyed 1000 independent workers to find out their experiences with paying taxes, and how prepared they were for the 2021 deadline. We found that there's a lot of stress, worry, and fear around figuring out this system and getting their taxes paid in full and on time.
Here’s what we uncovered:
1. 40% aren’t setting aside part of their income every month for their anticipated tax payments
Independent work gives individuals the freedom to pursue the career they want, or pick up a side job or two when they need extra cash. But independent workers still need to pay taxes. And they need to do so in a system that was not set up for them. Independent workers are themselves responsible for calculating how much taxes they'll eventually owe and are responsible for paying that amount. This means that they must set aside a portion of each paid invoice, sale, or app payout either in a budget column or in a savings account, not to be touched until it's time to pay their taxes.
But we found that 40% of independent workers are not setting aside funds to cover their tax payments. Is this because they’re trying to be evasive? More likely they don’t have the funds to spare, or don’t know the exact percentage. Or they don’t know they need to set part of their income aside to pay their taxes. Of course, it could be simple human nature: They may need the money immediately and spend it before they can set some aside. If it comes down to putting money aside into an account to sit there, or paying bills and groceries, they’ll pay bills and groceries first.
2. 42% don’t pay their quarterly estimated tax payments at all
Not only do independent workers need to set aside part of their income themselves for taxes — because they don’t have an employer taking funds out of every paycheck — they’re expected to pay that amount into both federal and state quarterly. (Independent workers can choose not to do this, but will face an underpayment fee come tax time.) The IRS expects that independent workers will pay their taxes as they go throughout the year. But we found that 42% of independent workers don’t.
They told us why. 27% actually do choose to wait until tax time, and then just pay the underpayment penalty. However, 27% said that they don’t know the process for paying their estimated quarterly taxes. 26% reported that they were unaware that they should be doing so. Finally, 20% don’t pay because they don’t have enough set aside.
3. 51% of independent workers worry about being audited
Everyone probably has a fear of being audited by the IRS, even when their taxes are straightforward and they’re simply inputting numbers from a W-2 into a 1040. But for independent workers who need to track how much they make throughout the year, do the calculations on how much to hold aside, track all their deductions, and make sure they’ve kept good records, the dread of the IRS knocking on their door looms large.
51% worry about being audited — which translates to 35 million of the 68 million independent workers out there. And no wonder: Throughout our survey, we found that independent workers are confused about the process for how to deal with taxes as an independent worker, don’t know the process at all, are concerned about having kept track of their deductions properly, fear making mistakes, and more.
4. As of our survey date on May 3, 2021, 18% hadn’t started their 2020 tax filing and didn’t expect to have it done by the deadline
Daunting, overwhelming, confusion, concern — it’s no wonder that just days before the extended deadline for 2020 tax filings, 18% of respondents hadn’t even started their taxes yet, which translates to 12.2 million independent workers behind. They also expected not to have their taxes completed by the deadline, either. It could be simple fear causing them to procrastinate. Or it could be the task of having to gather their records, receipts, invoices, expenses, and other records — again, a task W-2 workers don’t need to worry about.
5. 69% are concerned they’ll owe more than they thought once they file
Over two-thirds of our respondents are concerned that even though they expected to pay a certain amount in their taxes, and perhaps paid that amount in estimated payments over the course of the year, come tax time, they’ll discover that they underpaid, and will actually owe more. And suddenly owing a few hundred to a few thousand dollars is a big deal to many — and as we learned above, most workers aren’t setting aside the necessary funds in the first place.
As we found out, it’s the same concerns as above: 44% are worried because the process is confusing, and they’re afraid they made a mistake. 20% are concerned that they budgeted correctly. 18% weren’t sure if they had the right documents, which would cause them to owe more. 18% cited other reasons for concern. The fear is that a miscalculation, confusion around the process, or simply not preparing for it could suddenly wipe out someone’s savings, or put them in debt.
6. 33% believe they won’t be able to pay their taxes this year
Finally, one-third of independent workers simply believe that they won’t be able to pay their taxes this year. 2020 was certainly an usual employment year, where people lost income, shifted income, or took on new jobs to get them through the pandemic.
We could just blame the inability to pay taxes on the unprecedented nature of 2020 alone, but from what we’ve learned from our survey, it wasn’t the year alone that caused this problem. Confusion around the process or not even knowing the process, uncertainty about whether they’ve kept track of the right documents or not, not setting aside a portion of their income, fear of making a mistake — it all contributes to 33% of independent workers uncertain if they’ll be able to pay their taxes. Non-payment is an even bigger issue to worry about.
Businesses Are a Solution to the Problem
There's a simple solution for leveling the playing field for independent workers: Companies that serve independent workers can offer tax calculations and withholdings. Every invoicing software, every gig app, every ecommerce payment tool can offer tax withholding options at point of payout so that independent workers don't need to spend time, energy, and worry on figuring it out for themselves.
It's not just a benefit businesses that serve independent workers can offer. It can be a retention tool, a way to grow revenue, and a way to stay compliant with new regulations. It will also be the key to growing the future of the independent economy, and will take away barriers to entry for highly-skilled, passionate workers who want to make their livelihood their own.
Businesses can start offering this option today — it only takes a few hours to set up — because tomorrow, they may lose their workers to competition who are already serving and growing the independent economy.